How to calculate beta debt

Written by cecelia owens

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A risk premium gives the creditors a chance to see if the investment is worthy. (risk investment image by Warren Millar from Fotolia.com)

Beta debt or (debt beta) measures the risk taken by outside creditors. During an investment, the creditors will demand your investment's risk premium and risk-free interest rate. The amount of credit given to you depends on the probability that the investment will fault, according to the ML Fischer website. Being able to calculate your debt beta will help you provide your creditors with a professional plan and the numbers they want to see when considering providing funds.

Skill level:

Easy

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Instructions

1

Calculate the real resources cost of the investment. The real resource is the amount that the creditors have invested. Add 1 with the risk-free rate of interest, then divide that number by 1 minus the actual premium (see reference 2).

2

Subtract this solution by 1 to figure out the real resources cost. The risk-free rate is the basis of the assets, but it includes the risk premium (see reference 3).

3

Calculate the default risk premium. Take the real resource cost and subtract it by the risk-free rate of the interest. The calculation must be in percentage or decimals.

4

Complete the calculations by adding the risk-free rate to the default risk premium.